The OECD Task Force on Financial Services Recommendations of the OECD Task Force on Financial Services in National Accounts, 9-11 May 2004 Anders Nordin OECD

Two mandates Measurement of production of financial corporations. This includes: - Definition of financial corporations. - Identifying and measuring the production of financial services. - The choice of reference interest rate. Price-volume measurement of financial and non-life insurance services.

Statement of issues: The definition of financial corporations is mainly related to financial intermediation (activity). “risk taking’’ and “repackaging’’ are key elements for financial intermediation. No particular services or any particular composition of assets and liabilities are specified. Ambiguity about the role of own funds.

Recommendation 1 Financial corporations consist of all resident corporations and quasi corporations that are principally engaged in providing financial services including insurance and pension funding services to other institutional units. The production of financial services is the result of financial intermediation, risk management, liquidity transformation and/or auxiliary financial activities.

Recommendation 1 In principle, financial services can be provided as a secondary activity. In practice, however, in many countries, the provision of financial services is so strictly regulated that there may be no other unit providing financial services. By convention, even if financial services are provided by non financial corporations, no indirect charges are imputed. On the other hand, financial services provided for explicit charges are recorded as such.

Recommendation 1 Financial intermediation, financial risk management and liquidity transformation are productive activities in which an institutional unit incurs financial liabilities for the purpose of acquiring mainly financial assets. Corporations engaged in these activities obtain funds by taking deposits and issuing bills, bonds or other securities. They use these as well as own funds to acquire mainly financial assets by making advances or loans to others and by purchasing bills, bonds, or other securities.

Recommendation 1 Financial services provided include monitoring services, convenience services, liquidity provision services, risk assumption services, underwriting services and trading services.

Units lending own funds Relates to the status of units that finance themselves exclusively via equity. SNA (6.134): “Some money lenders lend only their own funds. The activity of such small-scale money lenders, including many village money lenders, is not financial intermediation as they do not channel funds from one group of institutional units to another. Lending as such is not a process of production and the interest received from the lending of own funds cannot be identified with the value of any services produced.”

Recommendation 2 The 1993 SNA states that lending own funds does not give rise to production. While it is true that units lending own funds do not engage in financial intermediation, with a broader definition of financial services, units lending own funds may provide a financial service. At a minimum, an incorporated enterprise (thus with a full set of accounts) which, as its main activity, provides loans to a range of clients and incurs the financial risk of the debtor defaulting, should be treated as a financial corporation. Its allocation to the appropriate sub-sector has yet to be determined.

Recommendation 2 In addition, some unincorporated enterprises which provide loans to a range of clients (other than just family and friends) on a regular business basis may also be treated as providing financial services. The advice of experts from countries where this practice is widespread is needed to specify when and how such units are to be identified and whether they are to be treated as unincorporated enterprises in the household sector or quasi-corporate enterprises in the financial sector.

Special Purpose Entities (SPEs): Institutional units? Ancillary units: ‘restriction “…providing services to the parent corporation” (SNA 93,paragraph 4.40).’’Ancillary corporations are not treated as separate institutional units because they can be regarded as artificial units created to avoid taxes, to minimise liabilities in the event of bankruptcy, or to secure other technical advantages under the tax or corporation legislation in force in a particular country’’ (SNA93,paragraph 4.44).

Recommendation 3 An entity providing financial services as specified in Recommendation 1 to only one unit or a group of units is considered to be a separate institutional unit (and a financial corporation) if it keeps a complete set of accounts and is capable of acquiring assets and incurring liabilities on its own account. A similar entity which does not have a complete set of accounts is treated an institutional unit (and a financial corporation) only if it is resident in a country other than any of the units to which it is providing the services, in accordance with SNA/BPM practice of treating non-resident unincorporated enterprises as quasi-corporations

Identifying financial services Financial services: the output that financial corporations produce and provide to their customers, explicitly or implicitly Financial instruments: the means through which financial corporations provide packages of financial services to their customers. Neither input in an SNA 93 sense (labour, capital, goods and services) nor output in terms of production of financial corporations.

Recommendation 4 Financial institutions charge for some services explicitly and some implicitly. From an economic perspective, all financial instruments are potentially involved in the production of financial services. Some financial instruments attract only explicit charges but several may attract implicit charges alone or in addition to explicit charges. Deposits and loans attract implicit charges and these instruments are included in the calculations of FISIM. Other instruments may attract FISM but will not be included unless a clear allocation to users is possible. Thus, in practice, FISIM may be limited by convention to loans and deposits.

Holding gains and losses: Issues Expectations of holding gains provide incentives to engage in productive processes. Holding gains are an integral part of the decision making process. Holding gains are components of returns on financial assets which might be considered.

Recommendation 5 When measuring the implicitly valued output of financial institutions, the question arises of whether expected holding gains and losses of financial institutions on their own account should be included in the measure. There is no question of including holding gains and losses as such in a direct measure of output in the SNA. However, for certain financial instruments, expected price changes constitute an important part of expected returns. In principle, therefore, they could be considered when approximating the value of financial services indirectly.

Recommendation 5 Despite this conceptual position, given the empirical difficulties in estimating expected holding gains and losses, it is presently not recommended to include expected holding gains and losses in the measurement of financial services output.

The choice of reference interest rate: SNA 93: “…represents the pure cost of borrowing funds – that is a rate from which the risk premium has been eliminated to the greatest extent possible and which does not include any intermediation services”. The Task Force has expressed preference for a single risk-free reference rate that has no service element in it and that reflects the maturity structure of risk-free financial instruments

Recommendation 6 The reference rate used in the compilation of FISIM should be a risk-free rate that has no service element in it and that reflects the maturity structure of the financial assets and liabilities to which FISIM applies. It is recommended that a single reference rate be used for transactions in the local currency, but different reference rates may be used for transactions in other currencies.

Measurement of volume and price for financial services indirectly measured For measuring the volume of output of financial services implicitly charged it is necessary to identify those services that form the set of output. No directly observable price or quantity representative of the output of financial services indirectly measured

Recommendation 8 The measurement of output of FISIM is discussed in recommendation 4. Ideally a direct deflator of the output at current prices should be constructed as a PPI that reflects the margin measure of FISIM. However the nature of of financial services cannot easily be connected to price and quantity units. Besides, the change in quality is an important issue in financial services. The length of opening hours for bank branches, the proximity of a local branch, the quality of investment advice are some central quality features of financial services.

Recommendation 8 In the absence of direct deflators one of the following approaches is recommended: The rate of change of the volume indicator can be derived using the rate of change of stocks of loans and deposits deflated by a general price index (e.g. the GDP deflator) on which the base year margin can be applied. Direct output indicator method. Break down the different characteristics linked to financial services (e.g. numbers and value of loans and deposits, savings, money transfers etc.). For each of the characteristics an appropriate volume indicator is to be derived. The volume indicators are then weighted together.